Legal Framework on Foreign Investment

May 11, 2007 at 10:43 am Leave a comment

Like many transition economies, Mongolia has adopted a comprehensive investment law setting out the framework for foreign investment. The Foreign Investment Law enacted in 1993 (latest amendments adopted in January, 2002) contains four sections dealing with:

  • General provisions relating to foreign investment, including a definition of foreign investment and an outline of the types and forms of foreign investment allowed.
  • Protection of foreign investment including legal guarantees and the right and duties of foreign investors including protection in the event of expropriation.
  • Operation of business entities with foreign investment including registration and dissolution of businesses, land use and other practical issues relating to the operation of business entities within Mongolia.
  • Settlement of disputes.

Definition of Foreign Investment and Foreign Investor

The 1993 Law defines ‘foreign investment’ as all tangible assets invested in Mongolia by a foreign investor for the purpose of establishing a business entity on the territory of Mongolia for the purpose of operating jointly with an existing business entity of Mongolia. According to the Law, a ‘foreign investor’ is a foreign legal person or individual (foreign national or stateless person not residing permanently in Mongolia and citizens of Mongolia with a permanent residence abroad) investing in Mongolia. According to Foreign Investment Law the company that has at least 25% of foreign interest is classified as foreign-invested company.

Areas for Foreign Investment

Foreign investment may take place in all areas of production and services; and in all parts of the territory of Mongolia where performing production and services is not prohibited by the laws of Mongolia.

Types of Foreign Investment
Foreign investment may occur through investment in:

  • Freely convertible currencies and reinvested earnings in tugrik.
  • Movable and immovable property rights.
  • Intellectual and industrial property rights.

Forms of Foreign Investment
Foreign Investment may take the following legal forms:

  • A wholly foreign-owned business entity or a local branch or subsidiary of a foreign enterprise.
  • A business entity jointly with a Mongolian investor.
  • A foreign investor makes a direct investment by buying stocks, shares and other securities of the Mongolian business entities under the legislation of Mongolia
  • By acquiring rights by law, concession and product sharing contract to exploit and process natural resources.
  • Marketing and/or management contract.
  • Financial leasing or franchising.

The 1993 Law on Foreign Investment provides that in any case where the law is in conflict with an international treaty by Mongolia, the international treaty will prevail.

Repatriation Rights

Article 10 of the Law on Foreign Investment allows foreign investors to repatriate profits, capital contribution to registered capital, dividends and other financial assets or benefits resulting from asset sales. Article 10 also allows investors to repatriate proceeds derived by withdrawing from, or dissolution of an investment.

The following income, profit and payments to abroad may be remitted without any barriers:

  • allotted stockholders income and share dividends;
  • allotted income after property and securities’ sale, transfer of property right to other party, completion of an investment agreement and liquidation of an entity;
  • principal and interest of debt or other identical payments;
  • compensation payment for confiscated property;
  • other income gained under the legislation of Mongolia.

Guarantees for Foreign Investment
The Law on Foreign Investment guarantees the following rights and privileges for foreign investors:

  • Foreign direct investment is protected by the Mongolian Constitution and by the Law on Foreign Investment complemented by relevant legislation and regulations, as well as by international treaties and agreements to which Mongolia is a signatory.
  • It is prohibited to expropriate assets or capital of foreign investors.
  • Foreign investors receive treatment equal to that enjoyed by domestic investors in relation to the right to own, utilize and exploit assets and capital.
  • Foreign investors are granted the following additional rights.
  • The right to own, utilize and dispose of investment assets and to repatriate capital invested in Mongolia.
  • The right to manage and to participate in the management of economic entities with foreign investment participation.
  • The right to assign and transfer their and duties to other legal entities.

Settlement of Disputes
Disputes between foreign and Mongolian investors, as well as between a foreign investor and a Mongolian legal entity, are resolved in the courts of Mongolia unless provided otherwise by international treaties, to which Mongolia is a signatory, or by a contract between the parties to the dispute. Mongolia joined the 1958 New York Convention on the Recognition and Enforcement of Arbitral Awards in 1994 and is also a signatory of the 1965 Washington Convention on the Investment Disputes between States and National of other States, which ensure the settlement of disputes in accordance with internationally agreed rules and procedures.

Phasing Out Tax Incentives

It is important to note that official government policy is to phase out tax incentives gradually and also to phase out other fiscal benefits that are inconsistent with Mongolian agreements with the World Trade Organization (WTO) and the International Monetary Fund (IMF). Under the protection of ‘grandfather’ provisions, existing investors benefiting from such incentives will not be deprived of their incentives during the phasing-out period.

Company Law

The Company Law of Mongolia is the most important and authoritative legislation that governs all operations and activities of business entities in Mongolia. The power of this law is expressed in its Article 98.3:

As of the effective date of this Law the provisions of other laws pertaining to companies shall continue to be effective to the extent that they are not inconsistent with the provisions of this Law.

The Mongolian Company Law permits creation of two basic forms of business entities (Article 3):

  • An open or joint stock company whose shareholders’ capital is divided into shares which may be freely traded by the public; and a closed,
  • Or limited liability Company whose shareholders’ capital is divided into shares, where the right to dispose of such shares is limited by the company’s charter.

The state may also participate in business through companies with state ownership. Any company may establish one or more branches or representative offices by issuing authorization to an executive of such an office. Authority to conduct business operations commences on the date of the entity’s registration in the state register at the local government office. The applicant receives a certificate of incorporation upon completion of registration. Failure to register a business entity can result in a substantial fine and confiscation of profits from the business enterprise.

Entities are required by law to include abbreviations identifying their form of organization as part of their registered names, as follows:

* “XK” (joint-stock company).
* “XXK” (limited-liability company).

Capital contributions for company shares may be made in cash; contributing assets or intellectual property. Owners’ equity in “XK” shall be at least MNT10 million and in case of “XXK” it shall be at least MNT1 million.

The governing board of each “XK” is required to retain an independent auditor or an auditing board with supervisory responsibility for the financial affairs of the company. The auditor or auditing board verifies the annual financial report prepared for the company of Form A71, a form prescribed for all companies. This verified report is then required to be filed on or before each 1 April with the Securities Commission, the company registrar, and financial and taxation authorities.

Contract Laws

Mongolia’s principal laws of contract formation, performance, assignment, remedies for non-performance etc. are found in the current Civil Code, enacted in November 1994 and amended a number of times later on, latest version was approved in spring of 2002. Issues relating to contracts concluded before the enactment date continue to be governed by the prior Civil Code.

Contracts involving legal entities or land, as well as most other contracts shall be in writing and be certified by notary public. The Civil Code principles of contract also govern stock exchange transactions, unless pre-empted by other laws. Performance of contractual obligations may be secured by penalties, pledges (including secured loans by banks), money deposits, and sureties. Evidence of each form of security shall be given in writing, and if the subject of the security is immovable property, public registrar’s certification shall be provided.

Incorporation Procedures

Foreign investors have the following options of establishing business in Mongolia:

  • A wholly foreign owned business entity or a local branch or subsidiary of a foreign enterprise.
  • A new business entity jointly established by foreign and/or Mongolian investment.
  • In shares or other securities of a business entity operating within the territory of Mongolia.

The first stage of establishing a company in Mongolia is to register a company name. All names of registered companies are recorded on a database at the State Registration Agency. Company names can be confirmed in a matter of minutes.

Following the registration of the company name, the foreign investor should apply to the Foreign Investment and Foreign Trade Agency (FIFTA) for a ‘Certificate of Foreign-Invested Company’. According to Foreign Investment Law the company that has at least 25% of foreign interest is classified as foreign-invested company. A complete application includes the following documents:

Application letter – including:

  1. Name, address, nationality of investor;
  2. Type and size of investment;
  3. Form of business entity;
  4. Sector of investment, activity;
  5. Term, stage of project investment and implementation.

Introduction of investors
If it is an application of a legal entity:

* Full introduction of the company/corporation:
* name, country of origin, contact addresses, type of activities,
* branches, permanent representations – contact addresses, type of activities
* administration structure,
* Copy of the National State Registration Certificate,
* A contact address of your bank.

If it is an application of an individual:

* Resume /CV/:
* full name, sex, nationality, date of birth,
* education, profession, occupation,
* if you’re a member of Mongolian or other foreign entity – names and addresses
* A contact address of your bank,
* Copy of the national passport.

Company name certification (issued by the State Registration Agency of Mongolia)

Agreement of a joint-venture company – shall be certified by notary public (not needed, if it is 100% foreign owned company)

* full information of investors and confirmation of authority with signing rights;
* full information of a business entity;
* detailed information of registered capital;
* rights and responsibilities of the Parties, management;
* if necessary, the establishment of a supervisory council, rights and duties, its members, the procedure of electing members;
* the voting procedure and the decision making procedure if the votes are tied;
* procedure of extension, termination and alteration on the agreement;
* other provisions.

Statute – for both JVC and wholly owned company – shall be certified by notary public

* full information on investors;
* full information on business entity;
* number of investors, detailed information of registered capital;
* rights and responsibilities of the Parties, administration;
* procedure of profit and loss distribution;
* finance and auditing;
* labor and social benefits of employees;
* resolution of disputes;
* suspension and termination of operations of a business entity with foreign investment, final accounting procedure;
* liquidation of the JVC;
* other provisions.

Other agreements to be related to the investment

Bank confirmation letter (from the investor’s bank)

Reference of ownership

Special approvals/licenses from the related Government Authorities according to the Special Permit Law of Mongolia passed in 2001 (if needed)

Feasibility study (for each type of activity)

Lease contract of premises

Sanitary Evaluation of work-place (issued by the Labor and Social Welfare Inspection Agency)

The Foreign Investment Law states that the Foreign-Invested Company Certificate shall be issued within 10 days. In reality, FIFTA usually issues the certificate within one week. The certificate is issued together with an order from the FIFTA Chairman establishing the company.

On receipt of the Foreign-Invested Company Certificate from FIFTA, the investor should apply to the State Registration Agency for the State Registration Certificate (equivalent to companies’ registration). The required documents are the following:

* Company name approval.
* Certificate of Foreign Invested Company (issued by FIFTA).
* License or recommendation of investing in a special sector.
* Company’s by-laws.
* Articles of association, if joint venture.

In order for the foreign investor to complete the SRC application, he must transfer into the country the minimum MNT10 million in capitals in the form of cash and equipment. The cash must be deposited into a temporary account in a Mongolian commercial bank. If the capital contribution is in the form of equipment, it must be brought into Mongolia at least as far as the Customs checkpoint at the border. Possession of a State Registration Certificate allows the holder to convert the temporary bank account into a permanent bank account.

Once the company has been incorporated, the State Registration Certificate, the Certificate of Foreign Invested Company and the company stamp are issued. The company’s bank account is then made permanent.

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Entry filed under: Legal Framework on Foreign Investment.

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Information contained in this web site are partly derived from a CD-ROM "Guide to Investment and Trade-Mongolia", produced by Foreign Investment and Foreign Trade Agency (FIFTA). All trademarks are properties of their own respective owners.

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